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It also provides a succinct guide for the manager who wishes to come to grips with this topic, or the accountant nostalgic to recollect the non too praiseworthy and indecisive history of this topic' - Managerial Auditing Journal Corporate Financial Reporting critically examines contemporary corporate financial reporting. The complexity of the reporting process and the myriad of issues facing the directors, accountants and auditors can only be successfully understood from a firm conceptual base. Recent financial scandals clearly highlight the interrelationships between all the themes explored in this book, from financial reporting to auditing, from management's motivations to fraud.

Corporate Financial Reporting and Analysis

To browse Academia. Skip to main content. By using our site, you agree to our collection of information through the use of cookies. To learn more, view our Privacy Policy. Log In Sign Up. Download Free PDF. Corporate Financial Reporting and Analysis. Arthur Han. Download PDF. A short summary of this paper. Imagine that you're a banker, and you have to determine which companies to lend to and on what terms.

Or you're an investor who wants to know which companies are likely to outperform the market averages over the next year or two. In short, where should you invest your capital? To answer this question, investors turn to corporate financial statements.

Financial statements exist to provide useful information on businesses to people who have, or may have, an economic stake in those businesses. You may notice one important constituency missing from this list of financial statement users: corporate management.

Financial statements are the responsibility of management, but are not designed to meet their own informational needs. Financial statements are a means for company managers to communicate the financial strength and profitability of their businesses to investors and other groups, but are not really intended for internal management use.

To understand why, let's take a brief look at the financial statements shown in Exhibits 1. Based in Taiwan, they supply components for a variety of consumer and industrial electronic devices.

The three principal financial statements -the balance sheet, the income statement, and the statement of cash flows -are highly aggregated documents: masses of detail accumulated in a small number of line items. Without this aggregation, the statements would be unreadable; however, a lot of details are missing.

While this lack of detail might be appropriate for potential investors, who have to compare financial data across many different companies, the information An Introduction to Financial Statements found in these financial statements is not sufficiently detailed to be of any practical use to managers in corporate decision-making. This is not to say that managers shouldn't care about the financial statements.

Managers must understand their financial statements because these are the most important sources of information used by the investing community to determine where to invest capital. Managers who don't understand the signals that their financial statements are sending to investors are not in a position to compete effectively in the global capital markets. However, internal decision-making and management control require data that are far more detailed by product line, region, cost categories, etc.

In addition, financial statements are mainly historical. The balance sheet reflects the financial position at a precise moment in the recent past.

The income statement shows profits over a period of time in the recent past -for example, the year just completed. Similarly, the statement of cash flows reports on the sources and uses of cash over a period of time already past. But while appreciating the insights of these statements is critical to managers in understanding their business and its competitiveness in the capital markets, they need information systems that are forwardlooking in nature. Managers plan, budget, and forecast -and they therefore need systems that help them to perform these critical functions.

Another problem with financial accounting from a management perspective is that accounting rules that are designed to measure costs or value assets can result in misleading figures, even when calculated in good faith by managers. For example, when a manufacturing company measures the cost of its inventory, it must include not only direct costs of production, such as labor and materials, but also manufacturing overhead such as depreciation on equipment, power and electricity, and maintenance costs.

In contrast with direct costs, overhead cannot be directly traced to individual units of production. Instead, they are assigned to individual products and to inventory accounts using an arbitrary allocation technique.

The resulting inventory figures may be acceptable for the broad overview that an investor wants from the financial statements, but can be seriously misleading if management intends to use them to calculate product-line profitability, to set pricing policy, or to make product-mix decisions.

In short, managers need cost-accounting systems that provide more detailed, and more accurate, costing data. The Three Principal Financial StatementsThe corporate financial reporting process focuses on the three principal financial statements -the balance sheet, the income statement, and the statement of cash flows. One of the first things you should notice is that the balance sheet reports on the company's financial position at a moment in time, in this case the end of and In other words, it's a snapshot, taken at the end of each period, of the assets owned by the company and the financing for those assets.

Assets are economic resources with the ability or potential to provide future benefits to a business, such as profits or cash flow. The financing of assets occurs in two basic forms: liabilities and shareholders' equity. Liabilities are the company's debts or obligations. They are the claims on the assets held by a firm's creditors. Shareholders' equity shows the amount of financing provided by owners of the business, both in the form of direct investment when shareholders contribute cash in exchange for shares and indirect investment when profits are reinvested in the firm.

It simply reminds us that the right side and the left side must always equal, for all companies, in all industries, in all countries, without exception. Simply put, the balance sheet must balance.

The reason why this is can be seen from the right side of the equation. Liabilities and shareholders' equity don't just represent financing, they also represent claims on the assets from the left side. In the event of liquidation i. The claims held by shareholders are residual in nature, which means that they are entitled to whatever is left over after the creditors have been paid off. Because shareholders' equity represents a residual claim on the assets, it will be whatever size it needs to be in order to ensure that the two sides of the balance sheet are equal.

TSMC's balance sheet confirms this equality. The Income StatementThe income statement reports on a company's profits, or revenues less expenses, during the accounting period. Unlike the balance sheet, it's not a snapshot, but rather reflects what a firm has accomplished over a period of time.

Notice that the accounting year sometimes called the "fiscal year" is the same as the calendar year 1 January December. This is not required, however. For example, most major retailers in the United States have accounting years that end between late January and the end of March.

This is done to avoid having to close the books and prepare financial statements at the busiest time of the year. The top line of the income statement, revenues also called "sales" or "sales revenues" , represents the monetary value of goods or services sold to customers. Expenses represent the cost of resources used by the company to earn revenues during the period.

Profit also known as "earnings" or "income" is shown in several ways on an income statement. For example, gross profit, sometimes called "gross margin," measures revenues, net of manufacturing costs. For a nonmanufacturing company, such as a retailer or distributor, gross profit equals revenues net of the cost of merchandise sold during the year. Operating income equals sales net of all operating expenses, excluding taxes. It measures how well the company has done in a given period from its normal, recurring, day-to-day activities of producing and selling its products.

When taxes and the nonoperating sources of income and expense are added or subtracted from operating income, as appropriate, the result is net income, the "bottom line" of the income statement.

Note that companies have discretion in how they categorize these costs. This discretion, otherwise known as accounting choice, is a theme we will return to throughout the book. In the case of TSMC, there are significant income items listed as "nonoperating" that might be classified as operating by other companies. Such choices can have significant effects. The Statement of Cash FlowsThe statement of cash flows summarizes the inflows and outflows of cash that arise from the three primary activities of a typical business: operations, investing, and financing.

For TSMC, operating activities refer mainly but not exclusively to the routine, recurring actions involved in the design, manufacture, and distribution of semiconductors and integrated circuits.

Investing The accompanying notes are an integral part of these consolidated financial statements. Financing activities refer mainly to actions involving the capital markets such as borrowing, paying off loans, issuing shares, share buybacks, and the payment of dividends.

The statement is structured in such a way that the net cash flows during the period for all three activities must equal the change in cash. In other words, the net cash flows from operating, investing, and financing activities must equal the net increase or decrease in the cash balance for the year.

You can easily confirm this reconciliation in TSMC's statement of cash flows. What makes this statement so interesting is not just that it summarizes cash flows, and in so doing reconciles beginning and ending cash, but that it also reveals the sort of activities that gave rise to those cash flows. In short, the statement reveals where a company's cash came from during the year, and what the company did with it. Much of this cash generated from TSMC's day-to-day operations was reinvested in the company.

We know this is true because of the negative cash flows from investing activities shown in parentheses. For example, the net income from the income statement e. Also, the net cash flows from the statement of cash flows see final line plus beginning cash on the balance sheet must equal ending cash.

These relationships should come as no surprise because, logically, we would expect a company's performance, as reflected in its income statement, to influence its cash flows, and for both profit and cash flows to influence its financial position i. To illustrate these relationships, let's take another look at TSMC's financial statements. Retained earnings on the balance sheet in the shareholders' equity section represent all of the net income a company has ever earned in its history that has not yet been paid to shareholders as a dividend.

In other words, it measures all of the profits retained by the business for reinvestment. We would expect retained earnings to change each year by an amount equal to the year's net income, less any dividends paid in that year. Note also that cash flows from operating, investing and financing activities plus effect of foreign exchange rates on cash and cash equivalent in , i.

Effect of exchange rates on cash and equivalents 8, The accompanying notes are an integral part of these consolidated financial statements. Other Items in the Annual ReportAs mentioned earlier, the balance sheet, income statement, and statement of cash flows are highly condensed. For this reason, firms are required to provide supplemental information in the form of supporting schedules and notes.

An opinion on the accuracy of the financial statements from a firm of independent public accountants must also be furnished. Depending on its country of origin, a company may also include a "management discussion and analysis" of recent performance and future prospects. The Statement of Changes in Shareholders' EquityThere is, in fact, a fourth financial statement presented in many annual reports, although it functions more like a supporting schedule, and thus is not usually accorded the same status as the other three.

This schedule, called the statement of changes in shareholders' equity although it sometimes goes under different names , explains changes to all accounts in the shareholders' equity section of the balance sheet.

Corporate Financial Reporting and Analysis, 3rd Edition

This book is intended to offer the rigor and comprehensive coverage required of an MBA text, while at the same time offering an accessible and practical reference for participants in executive programs. This book offers a rigorous, yet accessible, treatment of contemporary financial reporting practice. Examples are drawn from a broad range of companies to illustrate key concepts. Particular emphasis is given to the latitude and flexibility granted to managers in reporting financial performance, and the steps that financial statement readers can take to identify potential trouble areas in the accounts. Topics include the analysis and interpretation of the three principal financial statements, revenue recognition, inventory accounting, receivables and bad debts, accounting for long-term assets, provisions and contingencies, income taxes, and the accounting for mergers and acquisitions. A unique feature of this book is the seamless way in which it deals with differences in U.

Corporate Financial Reporting and Performance

Product Dimensions: 8 x 1. Corporate Financial Reporting Analysis combines comprehensive coverage and a rigorous approach to modern financial reporting with a. Merging traditional principles of corporate finance and accepted reporting practices with current models.

It seems that you're in Germany. We have a dedicated site for Germany. Globalization and the accompanying investment facilities available have resulted in rapid popularity for international financial reporting standards IFRS.

Financial Reporting and Analysis (Theory)Ph.MBA

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Brigitte D. 14.05.2021 at 10:32

This course is designed to impart basic knowledge on reviewing and analyzing financial statements.